Prices May Spike Again... Government Extends Fuel Tax Reduction for 2 More Months

Choi Sang-mok, Deputy Prime Minister for Economy and Minister of Economy and Finance, is attending the Economic Ministers' Meeting held at the Government Seoul Office in Jongno, Seoul, on the 21st, lost in thought. Photo by Jo Yong-jun jun21@

The government has decided to extend the temporary reduction of fuel taxes on gasoline and diesel by two more months, from the end of this month to the end of October. This move appears to be driven by concerns that inflation, which had fallen to the 2% range in the second half of the year amid unstable international oil prices, could rebound close to the 3% range.

On the 21st, the Ministry of Economy and Finance announced that it would issue a legislative notice to amend the Enforcement Decree of the Transportation, Energy and Environment Tax Act and the Enforcement Decree of the Individual Consumption Tax Act, extending the temporary fuel tax reduction measures by two additional months.

The government has extended the fuel tax reduction measure, first introduced in November 2021 during the COVID-19 pandemic, 11 times including this extension. Ahead of the scheduled end in late June, the government reduced the fuel tax cut on gasoline from 25% to 20% and extended it for two months until the end of this month. The reduction rates for diesel and liquefied petroleum gas (LPG) butane were lowered from 37% to 30%. Currently, the fuel tax stands at 656 KRW per liter for gasoline, 407 KRW for diesel, and 142 KRW for LPG. This measure is expected to maintain the existing tax rates on gasoline, diesel, and LPG.

The extension of the fuel tax reduction was supported by the high uncertainty surrounding future international oil prices due to instability in the Middle East. International oil prices have surged sharply amid heightened tensions in the Middle East and easing concerns about the U.S. economy. The U.S. government's decision to dispatch an aircraft carrier strike group and guided missile submarine units to the Middle East has escalated the risk of war, and reports of Iran targeting Israel further intensified tensions. On the 12th (local time), the closing price of West Texas Intermediate (WTI) crude oil futures jumped more than 4%.

Although the possibility of full-scale war between Iran and Israel is estimated at 5% (according to Bloomberg), growing anxiety over the situation is expected to push international oil prices higher. Additionally, the planned production cuts by OPEC+ (the Organization of the Petroleum Exporting Countries and non-OPEC oil-producing countries), including Russia, starting in October, are also cited as factors that could drive prices up. Since international oil prices are reflected in domestic gasoline and diesel prices with a lag of about 2 to 3 weeks, domestic fuel prices are likely to continue rising for the time being.

Inflation is also a concern. Last month, the consumer price inflation rate was 2.6%, with petroleum prices rising 8.4%, the largest increase since October 2022, expanding from the previous month's 2.4%. The government intends to minimize inflationary pressures from public utility fee hikes such as gas rates and the reduced fuel tax cuts, but concerns remain that supply shocks, especially in food products caused by heatwaves and typhoons, could limit price stability. The Ministry of Economy and Finance explained, "This amendment takes into account the uncertainty of domestic and international fuel prices due to Middle East tensions and domestic inflation trends."